Walgreen Strengthens Dividend Growth

For the latest news on your stock picks, connect with us on Facebook and follow us on Twitter. Sign up here for our exclusive investment round-up delivered directly to your email! We make investing easy!

Walgreen (WAG) is the nation’s largest retail pharmacy, with about 7,900 drugstores located throughout the U.S. Prescription drugs account for about two thirds of sales, with most of the rest attributable to nonprescription drugs and convenience items such as packaged foods, greeting cards, photofinishing, and household and personal care products. The company also operates in-store and work-site health clinics.

Walgreen is the world’s largest drug retailer. Walgreen’s stock currently trades around $35 per share, quite close to the stock price 10 years ago. The stock closed yesterday’s trading session at $35.79. In the past year, the stock has hit a 52-week low of $28.53 and 52-week high of $37.35. Technical indicators for the stock are neutral and the company’s fundamental ratios are healthy.

GROWTH AND BALANCE SHEET

WAG reported annual revenues of $71.6 billion, down by 0.8% year-on-year for FY 2012. The trailing-twelve-month return on equity at Walgreen is 17.24%. The company’s annual earnings growth rate over the past five years is 3.5%. The company has suffered a declining pattern of earnings per share over the past year. However, we feel this trend reversing over the next year as Express Scripts customers will return slowly. The total Debt/Equity of 29.5% stands at reasonable level and below the industry’s average.

VALUATION

With over 8,000 drugstores, WAG offers unmatched convenience with one of the most recognized brand names in the retail pharmacy business. The company enjoys a strong market share within the relatively stable U.S. retail drug industry. The company has experienced troubles recently, however, due to declining revenues resulting from the aftershock of its dispute with Express Scripts (ESRX). Walgreen Co has a PEG ratio of 0.85 the lowest of the sector. Walgreen’s trailing-twelve-month operating margin is 4.84%. WAG has a market cap of $31.85 billion. The P/E of 14.79 is attractive and below the industry average. The stock is currently trading at its fair value of $35. The beta of 1.17 implies low volatility of the stock with respect to the S&P 500, and we do not suggest the stock for traders.

RECOMMENDATION for next 6 months: We initiate our coverage with NEUTRAL. The company has demonstrated a pattern of neutral technical signs and steady earnings performance. Shares are up 8.23% year to date as of the close of trading yesterday.

For trading we suggest a short straddle at $40 strike price call and $28 put for the January 2013 expiration for total of $0.34 per contract.

Although the stock offers nothing for traders it deserves a closer look for investors who are chasing dividends. Walgreens offers a dividend yield of 3.09% but what makes the stock really attractive is the growing dividend for the last 36 years. Below you can find the history of annual dividend payments for the last 10 years.

NEWS and CALENDAR

Tuesday October 16, 2012 8:00 AM – Walgreens (WAG) (WAG) pharmacists are on the frontlines of a new transition of care program, WellTransitionsSM, which brings hospitals and health systems together with Walgreens in a coordinated care model designed to reduce readmission rates and overall health care costs, while improving patient health outcomes and medication adherence.

Monday October 15, 2012 3:58 PM – Walgreen Co. advertised free flu shots for members of the NYS Empire health plan but ended up sticking many of them with the bill.

Wednesday October 10, 2012 11:00 AM – Walgreen Signs New Limited Network Deals for Medicare Plans.

Friday October 5, 2012 11:29 AM –  Walgreen Reiterated at Neutral by Zacks Equity Research

WAG Strengths

• Average age and absolute number of older people is increasing
• Market leader
• Good cash flow from operations

WAG Weakness

• Internal Conflicts with employees
• The Growth of Wal-Mart as a Competitor

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

WAG’s intrinsic value is $35.00 the current price is $35.79, the stock trades at it’s fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

Each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. WAG’s annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.17, 2.02, 2.12, 2.94, 2.42 this type of earnings action is favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

Wag’s Total Debt/Equity of 29.50% is acceptable as the industry’s average is 53%

Quarterly EPS Change (This Quarter VS. Same Quarter Last Year)

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

WAG’s EPS growth for this quarter relative to the same quarter a year earlier is -55% well below our target.

Annual Earnings Growth

This model looks for annual earnings growth above 12%, but prefers higher than 20%.

Walgreen’s annual earnings growth rate over the past five years is 3.50%, below our target growth.

Current Price Level

Traders should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

WAG’s 52 week high is $37.35 current price is $35.79, only 4% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 14.79 the average industry P/E ratio is 1.65 and well below the S&P 500 P/E ratio of 17.00

Insider Ownership

When there is strong insider ownership which I define as 12% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 9.0% of WAG stock. Management’s representation is large enough. This does satisfy the minimum requirement, and companies that pass this test are more attractive.

Technical Analysis

I am using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

Technical indicators give a neutral sign for the stock.